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Paul Zimmerman

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Surplus Line Insurance in California: Watch Out

To companies and their employees engaged in surplus line activities in California - beware. The California Department of Insurance (CDI) recently reached a $12M settlement with an insurance holding company and certain of its insurer and producer subsidiaries related to the activities of unlicensed personnel and entities within the state of California, a resolution that illustrates the Department’s focus on and commitment to compliance with California laws governing nonadmitted insurance, which differ in significant aspects from those of other states.

The company in question had an eligible surplus line insurer with an affiliated producer and employees (each licensed as fire and casualty broker/agents, but not as a surplus line brokers) working in offices in California. The producer and its employees were involved in the placement of policies of surplus line insurance without surplus line broker licenses as required by state law (the policies were issued to California residents by one of the company’s subsidiary carriers not admitted to transact business in the state). The CDI also alleged that the producer impermissibly acted as the subsidiary’s managing general agent.

The foregoing came to light in the wake of a lengthy investigation by the CDI, during which the company self-disclosed various compliance issues. Ultimately, the settlement for licensing violations and unlawfully transacting surplus line insurance in California was reached, taking the form of a Stipulation and Waiver. Notably, by virtue of the company’s cooperation, half of the settlement amount ($6M) was suspended.

There is an important lesson to be learned here for similarly situated companies (those with affiliated producers, non-admitted subsidiaries, etc.). To wit, it is critical to evaluate operations and implement procedures that comply with the requirements and restrictions applicable to transacting surplus line insurance in California. Indeed, the applicable state laws are strictly construed and activities that may be permissible in other jurisdictions are not necessarily authorized in California.

To be sure, there are no lack of potential traps when insurer groups that include both admitted and non-admitted business have operations located in California, as the transaction of insurance in the state on behalf of a non-admitted insurer is, as a general rule, prohibited, with certain narrow exceptions that are both actor and activity specific. What is clear in such circumstances – experienced legal counsel is a must.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.